Interest Charged by a Creditor on an Overdue Account

by Bernard
(Papua New Guinea)

Debt creditInterest charged by a creditor on an overdue account would be debit or credit?

To answer this question you first have to work out what interest is.

Is interest charged by a creditor an asset, income, expense, liability?

The answer is that this is an interest expense. It is a cost to your business.

Even though you are not paying the creditor cash straight away, it is still a cost or expense and it will result in paying more money out of the business at some point in the future.

Expenses are always always always recorded on the left side, the debit side.

That's because they're the opposite of owner's equity, which occurs on the right side (credit).

So the entry would be like this:

Debit: Interest expense...........$100
Credit: Creditor............................$100

Hope that helps!

- Michael Celender
Accounting Basics for Students

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Comments for Interest Charged by a Creditor on an Overdue Account

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Interest Charged on Sales Ledger Control Account
by: Javan Smith

If we charge interest to late payers, it will go on the credit or debit originally?

Hi Javan,

This transaction is different to the main example above. In this case you are charging interest on a debt owed to your business (debtors, accounts receivable).

The interest is therefore income for your business, not an expense.

The journal entry would be like this:

Dr Accounts Receivable
Cr Interest Income

The debit to accounts receivable means more money is owed to your business. And the credit to interest income is simply because income is always credited.

Hope that makes sense!

Michael C.
Founder of Accounting Basics for Students

Wrong entry mentioned above correct entry is below
by: Anonymous

Interest exp.(Dr)
Interest payable.(Cr)

This would be the right entry.

Yes, also fine!

- Michael

It will be debited to Creditors Account
by: Anonymous

Entry will be as follows:

Dr Creditors Account
Cr Interest Expense

No that's incorrect, see answers and explanations above...

- Michael

by: Anonymous

How do we record interest charged to put debtors in an overdue account in our journals?

It's kind of the opposite of the above:

Dr Debtors (asset)
Cr Interest income

Hope that helps!

- Michael

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